In This Update:

Q of the Month:
Can I Put Roth IRA Distributions Back?
Key Focus:
What You Need to Know About Inherited Roth IRAs
Ruling to Remember:
Paying the Tax for Hardship Distributions

Resources

Expert
Professional
Assistance

?? Question of the Month: Can I Put Roth IRA Distributions Back?

Q: I am over 80 years old and have sufficient funds in my Roth IRA to purchase a new residence. If I withdraw a down payment and the purchase fails, may I reinvest the same amount that I withdrew for the down payment back into my Roth IRA?

A: Yes, but only if you get the funds back to the Roth IRA by rolling them over within 60 days from the date you receive them. IRS has the ability to extend this 60-day deadline, but they generally will not grant an extension when the funds were used while they were out of the IRA. In order to request an extension, you have to file a private letter ruling request and pay a fee to IRS. There is no guarantee that IRS will grant a request for an extension, and it typically takes six to nine months for a ruling to be issued.

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IRA Beneficiary Designation Deadline Approaching

The September issue of Ed Slott's IRA Advisor Newsletter details an important deadline on the horizon: the September 30 IRA beneficiary designation date.

For people who inherited IRAs in 2011, September 30, 2012 is a key date. It determines whether or not individuals will be able to maxmize their inherited IRA options.

This issue points out the differences between named and designated beneficiaries, looks at the Stretch IRA, pinpoints ways to remove beneficiaries and outlines rules for different types of beneficiaries.

READ THE ENTIRE ADVISOR’S GUIDE IN SEPTEMBER’S ISSUE OF ED SLOTT’S IRA ADVISOR NEWSLETTER

Inside Ed Slott's IRA Advisor Newsletter

The September 30 IRA Beneficiary Designation Date

Named vs. Designated Beneficiary
Stretch IRA
September 30 Rule for Determining the Designated Beneficiary
“Shake-Out” (“Gap”) Period to Remove Beneficiaries
Ways to Remove a Beneficiary
Death of a Beneficiary During the “Gap” Period Deson’t Remove the Beneficiary
Separate Accounts Rule
Splitting Inherited IRAs Too Late
Non-Designated Beneficiary Rules
No Separate Accounts for Trusts
Roth IRAs
Advisor Action Plan

Gust IRA Expert
John C. Neyland
JCN Financial & Tax Advisory Group, LLC
Baton Rouge, LA

Capitalizing on NUA in Company Stock

2013 Health Care Tax Chart

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September Key Focus

What You Need to Know About Inherited Roth IRAs

When a Roth IRA owner dies, the money belongs to the beneficiary. Although Roth IRA owners never have to take minimum distributions during their lifetime, the beneficiary must take distributions after the Roth IRA owner dies. Roth IRA beneficiaries have the same after-death stretch opportunity as if they inherited a traditional IRA. The only difference is that RMDs (required minimum distributions) from an inherited Roth IRA will generally be tax free.

There are two options for you as the beneficiary of a Roth IRA if you are the named beneficiary of the account:

1. The 5-year rule
2. The single life expectancy rule

If you choose the 5-year rule, you must deplete the Roth IRA by the fifth year after the year of the owner’s death. If you choose the single life expectancy rule (also known as a stretch IRA), the money will be paid to you gradually over your single life expectancy starting the year after the owner’s death if you are not the owner’s spouse. If you are the owner’s spouse, then you don’t have to start taking distributions until the year your deceased spouse would have turned age 70 1/2. Choosing the single life expectancy option

Choosing the single life expectancy option will allow the inherited Roth IRA to last longer and continue to grow tax free for you.

If you are the spousal beneficiary, you have a third choice that a non-spouse beneficiary doesn’t have - you can simply make the Roth IRA your own and never have to take distributions.

All Roth IRA contributions the owner made were not tax-deductible, so if you have inherited a Roth IRA, all of the contributions can be withdrawn tax free. The earnings can also be withdrawn tax free, as long as the account was held for more than five years (including the time the person you inherited from held the Roth IRA).

Ruling to Remember

Clanton v. Comm., Cite as 110 AFTR 2d 2012-5476

Hebert Clanton worked for the Michigan Department of Transportation when he was granted a medical layoff for a period of two years from June 2007 until June 2009. His company terminated his employment when he failed to return to work after the layoff.

Clanton received a distribution from his retirement plan in 2007, but did not report it on his taxes for that year. The IRS issued him a notice of deficiency stating that he owed nearly $5,000 in taxes. Clanton disagreed.

He argued that he was not retired, the distribution was from an individual retirement account (IRA) and that it was necessitated by financial hardship. The tax court didn’t agree with his arguments, determining that he was required to report the distribution in his taxes for 2007 and concluding that he was subject to a 10 percent penalty.

Clanton did appeal the decision, and the Commissioner stated that the penalty was improper because Clanton’s account was not an IRA, but instead was an employerplan not subject to a 10 percent penalty. He was, however, required to pay the back taxes.

LESSON TO LEARN:
It’s actually really simple. Even if you are taking a distribution due to hardship, you MUST pay tax on that distribution from a company plan or an IRA. Clanton would have had to pay the 10 percent penalty if the retirement account was deemed an IRA rather than an employer plan.